Google agrees to sell Motorola phone business for $2.91 billion

Retreating from its biggest foray into the consumer gadget business, Google said Wednesday it has agreed to sell its unprofitable Motorola phone division for nearly $3 billion just 20 months after buying it.

Google's $12.4 billion purchase of Motorola, its biggest deal ever, included not only the phone unit but also other assets. It was an attempt both to build a war chest of patents and also produce high-end gadgets that showed off its Android software and competed with Apple's rival iPhone. But it struggled with that last goal.

FILE - In this Wednesday, Sept. 5, 2012, file photo, Eric Schmidt, Google's chairman, speaks during a press conference in New York, where Motorola introduced three new smartphones, the first since it became a a part of Google. ((AP Photo/Bebeto Matthews, File))

Google has promised for months to turn around the money-losing Motorola division and has laid off thousands of its workers. But Google CEO Larry Page acknowledged in a blog post that "the smartphone market is super competitive and to thrive it helps to be all-in when it comes to making mobile devices. It's why we believe that Motorola will be better served by Lenovo," the world's fifth-biggest smartphone seller, which is purchasing the division from Google.

"I think they clearly recognize that the purchase of Motorola was not the smart thing to do and this is an important change they need to make," said Bob O'Donnell, an analyst with TECHnalysis Research. "My sense is they are losing money" on the overall Motorola purchase, although that remains unclear.

That's partly because Google acquired about $3.5 billion in cash from Motorola when it bought the company and it sold off Motorola's TV set-top box business for $2.35 billion in December 2012. In addition, under the $2.91 billion deal announced Wednesday -- which must be approved by regulators in the U.S. and China, where Lenovo is based -- Google said it will retain the "vast majority" of Motorola's more than 17,000 patents, whose value is difficult to estimate, analysts said.

Google executives have always said they bought Motorola primarily for its patents, which they license to phone makers using Google's Android operating system. By retaining those patents, some analysts said, Google can use them to encourage other companies to sell smartphones in this country. In addition, they said, Google can use the patents to defend against legal challenges to Android-based phones.

Even if Google hasn't lost money on Motorola, some industry observers believe the venture was a mistake for the search company. That includes tech analyst Patrick Moorhead, who said Motorola's sale to Lenovo "represents a failure for Google," which had "wanted to use Motorola to compete with Apple."

(FILES) A picture taken on August 1, 2013 shows the American-manufactured Motorola Moto X smartphone at its unveiling on August 1, 2013 at a a news conference in New York. (DON EMMERT/AFP/Getty Images)

Moorhead added that some phone makers, including Samsung -- the world's biggest -- weren't happy about Google selling phones in direct competition with them, while also encouraging them to use Android.

Other experts said Google now stands to benefit by unloading the phone division.

"This is a win for Google," said tech analyst Jack Gold, because it "gets them out of a business they don't have a chance of making any real money in and gets them the ability to concentrate on real opportunities without the diversion of having to run a device-manufacturing company."

Analyst Rob Enderle suggested another plus.

"Google is really unhappy with Samsung and how much power that firm has with Android, but they couldn't position Motorola as a replacement while they owned it" without angering Samsung, its biggest Android user, he said. Now, he said, Lenovo can promote Motorola and help "mitigate Samsung's power" without Google incurring Samsung's wrath.

In his blog post, Page said the sale doesn't mean Google is abandoning its other recent hardware ventures, such as wearable devices, home thermostats and other gadgets.

Google is still expected to produce its flagship Nexus devices and Chromebook laptops, which it designs and contracts with other companies to manufacture as a way of showcasing the latest features of its Android and Chrome software.

Wall Street seemed to like Google's announcement. The company's shares, which had fallen about 1 percent to $1,106.92 at the official close of trading before the deal was announced, rose more than 2 percent in after-hours trading.

Several experts said the deal also makes sense for Lenovo, which has become the world's biggest personal computer maker after buying IBM's PC business in 2005 and now hopes to become a major phone seller in the U.S.

During a conference call to discuss the deal, Lenovo CEO Yang Yuanqing said his company will "definitely challenge the leaders in the smartphone area over the next few years," adding, "I'm confident we will be successful."

Last year, Samsung owned about 31 percent of the smartphone market, Apple 15 percent, Huawei and LG nearly 5 percent, and Lenovo 4.5 percent, according to research firm IDC. If regulators approve its purchase of Motorola, Lenovo would move up into third place, with about 6 percent of the market, according to industry research firm Strategy Analytics.